Even though the current account balance for March FY12 registered a marginal surplus for the first time this year, the overall nine-month balance did not seem to offer much respite.
Much of the improvement in the current account balance for March comes at the heels of a relatively better trade balance, which improved from a deficit of dollars 1.4 billion in February to dollars 800 million in March this year.
The monthly improvement in the trade balance is due to a significant month-on-month reduction in imports by over 17 percent. This doesn show that imports have decreased this month, as a few weeks back, Reuters reported Pakistans fuel oil imports - Pakistans major import component - to have reached the highest level this year in March at 450,000 tons.
Likely, payments for some imports have not been recorded in March, which means that the import bill for the next month may be much higher as the impact will be observed once payments are recorded.
Overall, however, the surplus this month did not prevent the current account balance from crossing the ominous dollars three billion mark during 9MFY12, as against a relatively paltry deficit of dollars 10 million during the same period last year.
The year-on-year worsening of the trade balance was prominent for 9MFY12, with an increase in imports of about 15 percent during July-March FY12 relative to the same period last year, while exports were only slightly above two percent on a same periodic comparison.
The rise in imports comes at the heels of rising oil prices. According to the latest trade data of the Pakistan Bureau of Statistics uptil February FY12, average monthly price of petroleum products has risen by 28 percent year-on-year during 8MFY12. With oil prices not appearing to recede anytime soon, the trade balance will only deteriorate further going forward.
On the exports side, declining cotton prices - roughly 36 percent in international markets during July-March 2011-2 relative to the same period last year - can explain the slump in export earnings. However, concerns also exist on the value-added textile exports category, since prices of major value-added export products have also started decreasing lately, as per the latest statistics available from the PBS.
The decrease in average prices of value-added products has been felt after a lag since the decrease in cotton prices, and the likelihood of these prices decreasing further will also swell the trade deficit in the coming months.
The only silver lining comes from the workers remittances, which increased about 22 percent on a year-on-year basis during 9MFY12.
The capital account, meanwhile, continued showing a cheerless picture of falling FDI inflows and ebbing portfolio investments. FDI inflows during 9MFY12 nearly halved relative to the inflows during the same period last year to $600 million. During FY07, FDI inflows were as high as dollars five billion, and the decrease by FY12 is significantly lower at about one-eighth of the levels seen back then.
Meanwhile, portfolio investments took a turnaround from an inflow of 235 million dollars during July-March FY11 to an outflow of 130 million dollars during July-March FY12.
Pressure over SBPs reserves was also obvious, with gross reserves decreasing by 83 million dollars in March alone, while the decline was a colossal 2.8 billion dollars during 9MFY12 relative to the same period last year.
Repayments to the IMF will be causing further strain to the reserves. The first installment of 399 million dollars was repaid to the IMF in February this year, and another 399 million dollars and 110 million dollars will be due in May and June, respectively.
The strain on reserves will be felt in the rupee-dollar exchange rate, with greater likelihood that the rupee will depreciate even further in the near future thanks to the frail position of reserves.
The situation shows that the coming few months of the fiscal year will be tricky for the economy as far as the balance of payments are concerned, with not much respite from the trade balance and additional stress due to IMF repayments.
Restoration of CSF payments will be a major help for the flailing BoP. News regarding the Finance Ministry having received a portion of the outstanding dollars three billion of CSF payments has been doing the rounds of the local media.
With US-Pak relations affecting CSF inflows considerably, the US can use these payments for future political negotiations with Pakistan. Without much respite from the trade side or capital account, it seems like Pakistan will have little choice should such a negotiation be suggested.

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